Before the Federal Reserve acted last week to cut interest rates, it
was listed among the culprits behind the slowing economy. Even on the
right, the likes of Jack Kemp, Lawrence Kudlow, James Glassman and voices
from the Wall Street Journal op-ed page were chiding Alan Greenspan and
company for "tight money" strangling the economy.

"Tight money" may be blamed for the cooling off as plausibly
as George W. Bush can be said to have "talked down" an otherwise
sound economy. In fact, since the mid-1990s money and credit have been
growing at a feverish clip, as measured by M2 and M3. With each hiccup
in the conventionally accepted economic models, particularly during 1999's
Asian contraction, more liquidity and growth has been added to the money
supply. Throughout the Clinton years, easy credit has been portrayed as
the path to prosperity. Remember: The entire case for the Clinton tax
increase somehow perversely being able to stimulate growth rests on the
assumption that it closed the budget deficits, lowered interest rates
and boosted consumer spending and investment through the greater availability
of credit.

On the contrary, rapid disinflation acted in much the same way as a tax
cut for accelerated depreciation and offset the Clinton tax hike, which
never actually was able to generate enough revenue from upper-income taxpayers
to balance the budget. Economic growth was finally able to increase revenues
enough to generate the current surplus projections. Greenspan and some
able Clinton Treasury secretaries, such as Lloyd Bentsen and Robert Rubin,
did generally promote a strong dollar to the benefit of the US economy.
But none of them ever really understood how spurts of excessive monetary
growth and lax credit were not creating real wealth, but were instead
distorting the economy.

This is because the economy did generally enjoy price stability, especially
as measured by the Consumer Price Index (the value of which can be debated,
though it is worth noting if for no other reason than it is commonly cited).
This is because most of this excess fiat money found its way into asset
prices rather than prices for consumer goods and services. This has triggered
a speculative boom that exaggerated many stock prices, something that
is now being corrected for.

What is so "excessive" about excessive money and credit? First,
it distorts the market prices that inform business decision-making, causing
them to make incorrect decisions on the basis of government manipulation
rather than market realities. Second, it causes banks to loan absurd amounts
of money to businesses that aren't going to make money. The result is
vast amounts of savings being wasted on that which is unprofitable, and
a Keynesian reliance on consumer spending rather than the creation of
real wealth. Hence, we have the highest debt to GDP ratio in history,
amidst a massive build-up of personal debt under the reign of those who
volubly criticized the national public debt during the Reagan years.

In other words, money can be loaned to all kinds of dot.com companies,
causing them to expand and inflating their stock prices. But simply printing
more money doesn't make these businesses profitable. Money is a means
of exchange, not wealth itself. You can't eat money.

Only loose money and credit can create an economic environment in which
businesses with absolutely no profit can see their stock prices soar to
unprecedented levels. But that can't last forever. And when investors
realize the dot.com emperor, in some cases at least, has no clothes, the
boom ends. Unfortunately, it does not end before a whole lot of bad investments
were made and a whole lot of capital and labor resources were misallocated.

Supply-siders are correct to recommend tax cuts, especially reductions
in marginal rates, and deregulation to promote economic growth. These
policies are our best hope of averting a recession in the short term and
the best way to encourage innovation, production and wealth creation in
the long term. But they are foolish to advise us to inflate our way out
of an economic slowdown. Monetary expansion, even in the absence of rising
consumer prices, will only prolong the bad investments now being washed
out of our economy. As Ronald Reagan once said of big government, easy
money is the problem rather than the solution.

America cannot inflate its way to prosperity anymore than the vaunted
Asian powerhouses could. The bad investments such policies encourage will
and have come home to roost. We can however alleviate the tax and regulatory
burden on productive Americans, thus enabling the free market that is
truly our engine of prosperity. Nobody is smart enough to accurately manage
a $10 trillion economy for a population of 280 million people. Not even
Alan Greenspan.

W. James Antle III is a former researcher for the Rhema Group, an
Ohio-based political consulting firm. You can e-mail comments to wjantle@enterstageright.com.